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Dumbest Thing I Have Read Today

I agree with Kevin Drum, this is the dumbest thing I have read today:

There is a solution to the rising cost of oil, but it is a painful one. Let's say there is a lot of $20-a-barrel oil in the world — deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The answer is: no one.

Basically, American taxpayers have to guarantee potential producers that the price in the future will not fall below $20 a barrel and that they will not lose their investments.

This is easy to do. The U.S. needs to guarantee that it will buy all of its oil at $20 a barrel before buying anything from OPEC. This forces the price of oil down to $20 a barrel, but it eliminates the possibility that it will ever go back to $5 a barrel.

The implication that no one will add capacity if there is anyone at all to the left of them on the supply curve is just silly, and defies history in any number of industries, including oil.  By this argument, no one would be building super-deep water oil platforms today.  The reason there is not more oil exploration today in certain areas of North America is that there are formal and informal government restrictions that make it hard and/or impossible.  And to the extent that oil companies are treating current oil prices as a bubble that will inevitably fall, all I can say is, bring it on. 

Posted on April 11, 2008 at 09:06 AM | Permalink

Comments

Not to mention that there are any number of _private_ investment banks who will put together a nice hedging instrument to reduce your exposure to future oil price drops.

Posted by: Kevin Dick | Apr 11, 2008 9:48:17 AM

I think the McCain quote on sub-prime was worse.

Sale price guarantees for producers would help reduce risks. It would make things more likely but, as you pointed out, it's not as though cheap oil didn't preclude such projects in the past.

Posted by: Allen | Apr 11, 2008 10:55:43 AM

Yeah! That's the ticket! Because Wal*Mart won't sell jeans for under $100, because that's how much some other people are getting for jeans!

...

Wait.....

Posted by: Foxfier | Apr 11, 2008 5:41:42 PM

Some would think that after the great success that price controls and other mandated government interventions on market prices have been through History, people would learn not to make such stupid statements. As Einstein once said: "Two things are infinite: the universe and human stupidity; and I'm not sure about the universe."

Posted by: Frederick Davies | Apr 12, 2008 12:52:05 AM

How about a price-supporting import duty? For instance, a tax that is zero when the price of imported oil is above $80, or 25% of the difference between $80 and the price when it is below $80.

Posted by: markm | Apr 12, 2008 8:54:32 AM

The real issue is that government action does much to discourage investment. It often makes it hard to get permits for investments in this country. It can support a price bubble and then change and help deflate it (the Carter years versus Reagan). And many politicians want to penalize forward-looking companies that risked major investments so they'll have the extra capacity when the price soars by taxing "profiteering".

And the rest of the world is worse - investing in many countries is to risk that the government there will confiscate your investments. Also, governments collude to create monopoly pricing (OPEC), and then cheat and undercut those agreements.

Posted by: markm | Apr 12, 2008 9:01:47 AM

While I am not necessarily for it, there is a national security argument to be made for subsidizing US energy "independence" (really a drop in imported oil). The high price of imported oil is a major national security issue - it is enriching hostile cultures and governments, while damaging our economy.

The trick, as with anything a government does, is to keep the cure from being worse than the disease. I don't have a lot of confidence in government there - look at the insane ethanol industry (which is about to go bust unless the price of corn drops).

Posted by: John Moore | Apr 12, 2008 5:48:36 PM

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